Readers' comments

Capital expenditure does not directly cause any impact on corporate profits. Only the associated depreciation charges over the years of asset usage are charged against corporate profits. Net profits can be distributed as dividends, retained for rainy days, or spent as capital expenditure (if sufficient cash exists). Furthermore, greater capital expenditure at high returns on equity would result in further increased profitability (unless every firm in the industry acts in the same way, thus bringing down prices and "normalising" the RoE in the industry).

There is quite difference between the profitability of the company and its level of capex that should be distinguished!

The gap between workers and corporates has been rising over the past three decades. As pointed out in a work in progress piece by Autor and Dorn from MIT, employment and wage polarization took of at the same period: in 30 years, for the lowest income groups, real wages have barely changed while the highest income groups experienced ´sizable wage growth´. They argue that this increase in inequality is attributed to skill-bias specialization which allows high-skill workers to earn growing premia. Looking back at the profit graph, maybe the same process is happening for large ´superstar´ corporates.

Despite the fragile economy and high unemployment, the private sector is making huge profits. The process of specialization since the 1980s has eroded the power of unions in favor of a flexible labor market. At the onset of the crisis, many firms were able to sack workers so that the corporates are now drifting towards higher profitability again after a bump in the graph in the period 2007-2010. Hence, capital reigns over labor.

Isn´t it ironic that such an appartently good-looking graph can be a cause of concern to economist these days, as it is not showing us the American economy is doing well, only that labor is not doing well relative to capital these days. Are it superstar corporates or superweak unemployed and low/skilled workers? Marx couldn´t be more cynical.

haha the greatest thing about people like you is that I don't even need to ask if you're american nor do you need to write that you're from ohio. Its obvious. So in what world has Obama indicated that he plans to "nationalize" companies? Not only does your comment have nothing to do with the article, it also embodies the sheer idiocy that accompanies so many critics of Obama. Despite not going into a discussion about what are left and right social policies, The Economist would probably appreciate if you actually went and learnt what a socialist agenda looks like because i am so tired of people like you throwing the word socialist around. You have no clue what socialism is!

Corporate capital in advanced economies appears to have become ‘constipated’. Many, but not all, corporate leaders appear unable to use their organizations’ currently very high levels of liquidity to drive the transition of Western economies toward the more socially and environmentally sustainable mix of economic activities that politicians and economists are everyday becoming clearer must, for the sake of the planet’s health and its human inhabitants’ well-being, possibly even survival, be executed as soon as possible.

This ‘constipation’ must stem from corporate officers being ‘stuck in an iron cage’ of patterns and modes of thought that have, as a result of financial (if not economic) success, become dominant in the organizational sub-cultures in which they live.

But what seems typically to constitute that cage?

In a healthy corporation, top-level corporate conversations will likely be a political boxing match between two ‘corners. In the ‘blue corner’ will be the people whose primary strategy is financial prudence. These people are naturally refining every procedure by which financial management can be rendered more efficient and predictable in a bid to conserve impregnably strong cash and cash-convertible assets for their corporation, its shareholders and most of its most orthodox managers – against a presumed likelihood of a continuing season of shocks and/or low growth in established markets. In the ‘red corner‘ are the people concerned with what can all too easily be disparaged as ‘the sappy idea of the corporation’s soul’, for whom a more explorative, perhaps expansive, but in any case less easily quantifiable and direction is much more instinctively attractive but seemingly impossible to justify to uneasy colleagues in the blue corner.

You mean that classic economic theory on markets and the way the actors behave in this example is seriously flawed/limited? Shocking!

Really don't know who is the biggest rube - fools who believe that we could all live in piece and harmony or the fools who believe the classic economic theory explains much of the way people/firms actually act. Going the later only because they are often so insist they are right.

The greater one's RELATIVE wealth, the more risk averse one becomes. If one is already close to the top of the world (relative to one's peers), why bother with anything that's not a sure thing? If someone below you figures something out, chances are you have enough of a lead/cushion to jump on the bandwagon (and perhaps even crush the smaller players who risked to discover it), and if no one figures anything out, you are perfectly content where you are.

It's why wealth concentration (whether among firms or among individuals) ends up killing experimentation, which kills innovation, which kills growth.

EXCELLENT POINT! The wealthiest are also the more content in not wanting change of any kind, whether it be in business, in congress, or social groups...... The one's who are struggling are the biggest catalyst for change...

The change seems to happen around 1980. That coincides with the switch to inflation rate targeting. After that interest rates have been suppressed ever more. FRED data (FRED PSAVERT) also shows that private savings rates have gone down and down with the lower interest rates until the 2008 financial crisis forced a positive savings rate. There could be a link because interest rate suppression transfers wealth from saving to asset owning.

Would you invest if you knew the economy has only been supported by money printing? Companies know consumers will start to retrench and they therefore have to build their cash reserves for the hard times to come.

Quantitative easing merely distorts decision making and brings consumption forward. Sooner or later the future will arrive.

Agreed! I think most people w. capital on the side lines are either doing so because it's outside the US "AAPL" and they don't want to pay taxes on it or they're waiting for the long in coming dip so they can buy back in. I'm not convinced that QE delaying the process is either a good thing or a bad thing. If anything I think it just mucks things up and delays the inevitable.

Another possible reason for the cash mountain is business people just don't see opportunities for investment. It could be we are experiencing a crisis in the real or physical side of the economy as well as with the financial system.

Given that capital gains are incresing it makes more sense than ever to tax capital gains at the same rate as earned income. People will still invest because they will still make a good return on their investments. I've never turned down a raise because I'll end up paying more taxes - I look at the (additional) cup as 75% full instead of 25% empty.

Actually, corporations are weak and labor in the most powerful union in the country is strong. The de facto union of corporate executives and directors, which has used its political power, within companies and in the country at large, to gain an ever rising share of those corporate profits. Shareholders, the purported owners of capital, have gotten little.

"Managers are motivated by share options and share prices are driven by changes in earnings per share. Spending cash on share buy-backs boosts earnings per share immediately, whereas a capital-investment programme may actually reduce earnings in the short term."

Share options involve watering down existing stockholders as those in the executive class grant stock to each other. This has been balanced, to an extent, by share buybacks. The shift to buybacks from dividends and investments has left shareholders with far less, with executives taking far more. It is a robbery.

Having that executive pay in some cases taxed less as capital gains, even though the beneficiaries risked nothing, just adds to the robbery. This is what constitutes "success" in our degraded economy.